Investors interested in green technology might want to take a look at Covanta Holding Corp., an operator of energy-from-waste — or “EfW” — facilities with a stock that looks poised to break out as the company gears up for a period of sustained growth.

But first Covanta
CVA, -1.39%
needs to change perceptions among its biggest critics, which, perhaps ironically, include certain environmental groups and institutional investors who assume the stock should be valued like an energy company.

Covanta operates 42 EfW facilities in North America, China and Europe, allowing it to generate revenue from multiple streams. The company earns money from tipping fees for taking in tons of municipal trash; it forms long-term contracts with utilities to sell the electricity generated from burning that trash. It also makes money from the ferrous and nonferrous metals it recovers from the huge piles of waste deposited at its facilities.

Chief Executive Stephen Jones said the company recycles more than 550,000 tons of metal a year, enough to build the Golden Gate Bridge six times. “That provides between $90 [million] and $100 million in revenue a year, just from what we pull out after combustion,” he told MarketWatch.

In December, Covanta entered a partnership with Green Investment Group, a unit of infrastructure financing specialist Macquarie Group Ltd., to develop and invest in EfW opportunities in Ireland and the U.K. As a first step, GIG invested €136 million in a 50% equity stake in a Dublin facility that was completed in 2017.

Based at Poolbeg in Dublin Port, the 58-megawatt EfW facility, which took 20 years of negotiations to get off the ground, is already processing about 1,800 tons of solid waste a day, and generating 50 megawatts of electricity. That electricity is being transferred to the Irish national grid to power 80,000 homes. Covanta and GIG have earmarked six projects in the U.K. that are expected to eventually treat about 2 million tons of waste every year.

Covanta

Covanta facility in Poolbeg, Dublin.

For Covanta, the GIG deal is a key means of deleveraging its balance sheet and putting it on a path toward cash-flow growth, both of which are needed to boost a stock that has traded sideways for about a decade.

Analysts are impressed.

“Covanta has made progress reestablishing the market’s confidence that its business model is predictable and the free cash flow is sufficient to maintain the current dividend,” Stifel analysts wrote in a March note, at which time they reiterated their buy rating on Covanta stock.

Europe is a key market for Covanta, because many countries, including Germany and France, have embraced technology that helps them shift waste away from landfills, which are damaging to the environment and use up increasingly valuable land. Many European countries have landfill taxes and charge higher tipping fees — that is, the charges levied on the waste arriving at processing facilities — to those who use them. Landfills produce methane gas, which is far more damaging to the environment than carbon dioxide.

The U.S. market has lagged, “because there’s a lot of land, so there’s less incentive,” said Jones.

If the U.S. were to embrace EfW as enthusiastically as Europe has, it could generate $130 billion in direct economic activity and create 350,000 new, and mostly well-paying, jobs, according to Covanta, citing research from Columbia University.

That research found that if the U.S. had switched to energy-from-waste plants in 2011, instead of delivering waste to landfills, it would have averted the production of 264 million tons of carbon dioxide, equal to closing 63 coal-fired plants.

This is how the technology works:

As the diagram shows, post-recycled waste is delivered to an EfW facility, sorted by crane operators and then transferred to a combustion chamber. The waste is burned at high temperatures, which produces steam that is either sold as is, or is used to drive a turbine and generate electricity.

The company’s air-pollution-control equipment cleans and scrubs gases, while particulates are captured by special filters. The facilities produce steam that exits through a stack, which is said to sometimes be mistaken for smoke by locals. The inert ash is then processed to gather metals for recycling.

Covanta

The process reduces waste volume by 90%, and Covanta is working to make the final 10% into a reusable commodity, according to James Regan, Covanta director of communications.

A dedicated team is working to develop a system to reuse ash at one of the company’s Pennsylvania sites and create a material that could be used in building roads and making construction materials, he said.

“We’re paying to have the ash removed now, so this could be a major benefit for the company,” he said. “We also work to reuse all the water from the process and even store rainwater at our facilities. Many of our facilities are zero-process water discharge, meaning that only sanitary wastewater is discharged to the local wastewater-treatment plant. The rest is kept in-house and reused.”

The long view

One challenge facing Covanta is to convince environmental groups, particularly “zero waste” proponents, that the company can be an ally rather than an enemy.

The environmentalists’ concerns aren’t just that burning trash is dirty, although they are skeptical that the steam stack does not contain pollutants. Covanta is not the only party rebutting that notion.

“In most cases, such opposition is due to misinformation from outdated facilities where [air-pollution-control systems] are not being used,” determined the Columbia research. “The achievements that the [waste-to-energy] industry has made in the last 30 years with respect to the near elimination of dioxins needs to be recognized globally by both the general public and environment agencies.”

The bigger problem for zero-waste groups is that municipality contracts with EfW companies like Covanta tend to be long term, and as long as the waste is being burned and dealt with, the municipality is unlikely to take the steps needed to get to zero waste for years, or even decades.

“Enough is enough,” said Richard Anthony, principal consultant for Richard Anthony Associates and a board member with the California Resource Recovery Association (CRRA) and the GrassRoots Recycling Network (GRRN). “If it’s not recyclable or compostable, it doesn’t belong in our community.”

Covanta CEO Jones said most recent waste contracts are shorter term, ranging from one year to 10, as municipalities look to lock in waste-disposal costs.

Covanta isn’t opposed to zero-waste initiatives, but it believes getting there is a process that will take time. What’s happening in Europe, which is traditionally more environmentally proactive than the U.S., is that, rather than competing, Covanta and environmental groups are complementing each other’s efforts while society works toward a zero-waste goal.

The U.S.’s Environmental Protection Agency said in 2014 that about 89 million tons, or about 35%, of the 258 million tons of municipal solid waste (MSW) that was generated was recycled and composted, while 136 million tons, or about 53%, was steered to landfills. Less than 13% of MSW was combusted with energy recovery.

To Jones there’s a way to be more sustainable along the path to zero waste, in which recycling is coupled with EfW: “That’s the first step: more recycling.”

“Zero waste is a commendable goal, but it’s hard to achieve,” Jones said. “A more attainable goal for the next generation is having less waste go to landfill.”

Note to investors: We’re not an energy company

One factor that has weighed on Covanta’s stock is that investors view it as an energy play rather than a waste play, although the revenue that comes from waste-disposal services is more than triple the revenue from selling electricity.

Covanta derived $1.23 billion, or over 70% of its 2017 revenue of $1.75 billion, from its waste-services business, while $334 million, or less than 20% of its revenue, came from its energy business. The rest came from its recycled metals and other businesses, which include disposing of pharmaceutical waste and cleaning up after industrial spills.

The company’s stock tracks the energy sector
XLE, +0.37%
and natural-gas prices
US:NGK18
much more closely than it does shares of waste-disposal company Waste Management Inc.
WM, -1.06%
.

FactSet, MarketWatch

One possible reason for the relatively high correlation between Covanta’s stock and the energy sector is that Covanta’s largest subsidiary, which owns the EfW facilities, is called Covanta Energy Corp.

And the reason the stock is correlated to natural-gas prices could be because the prices it commands for electricity can be determined by prices paid to its competitors, which are often natural-gas-powered electricity generators.

FactSet, MarketWatch

If investor perceptions change, that could lead to a revaluation of Covanta’s stock and provide a boon for Covanta investors. Covanta’s stock is currently trading roughly where it was nine years ago, while Waste Management shares and the S&P 500
SPX, +0.14%
have more than tripled over that span.

Jones expressed confidence that the company is in a strong position to drive growth, especially as more companies and regions adapt sustainability goals and seek to reduce their carbon footprints.

“We want to get more out of the U.S. assets we have on the ground,” he said. “We have an important footprint and now a lot of S&P 500 companies have energy and sustainability goals that we can help them meet.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.